How Cannabis Companies Tackle Legal Twists and Turns of Medical Marijuana Regulation

While the market for cannabis (or medical marijuana) grows due to the liberalization of state laws regulating growing, transportation, sale, and use of cannabis, companies that are active in the cannabis space will benefit from staying aware of legal and regulatory pitfalls.

When our cannabis lawyers review a proposed cannabis venture, we quickly move to:

  • Spot key legal “red flags”
  • Guide the client with recommendations regarding business structure
  • Advise the client as to how local cannabis law (for example, California cannabis law) might constrain or shape the proposed cannabis business model.

Corporate Practice of Medicine, Kickbacks, and Fee-splitting

In the cannabis space as elsewhere in the healthcare market, key legal challenges include the prohibition against the unauthorized and corporate practice of medicine.  Corporate practice of medicine has to do with arrangements that regulators could regard as unlawful intrusions by administrative persons and entities into the clinical practice of medicine, psychology, and certain other licensed healthcare professions.

On its website, the Medical Board of California lists a broad range of activities that constitute corporate corporate practice of medicine.  These target non-physicians exercising control over a physician’s medical practice, even where physicians own and operate the business.

Cannabis ventures must take care to not trigger enforcement red flags for either corporate practice of medicine, or self-referral and anti-kickback violations.  When medical doctors and laypersons wish to enter into business together, they should be aware of federal and state scrutiny of these kinds of arrangements for illegal kickback or fee-splitting activity. All of these services must be provided at fair market value.

Kickbacks and fee-splitting are related.

A “kickback involves the payment to or from the licensed healthcare practitioner) in exchange for a referral. “Fee-splitting” involves the notion that the physician and third party are essentially divvying up the patient charge between them. Either, or both, are prohibited under California Business and Professions Code, Section 650.

Enforcement authorities often combine a charge of corporate practice of medicine with one of violation of California Business & Professions Code Section 650.


Fundamentally, you’re worried about legal rules prohibiting kickbacks, fee-splitting, corporate practice of medicine, as well as Stark law; you don’t know whether the MSO or management structure […]

Physician Recommendations of Cannabis; Unlicensed Practice

Business and Professions Code, Section 2525.4 indicates that it is unprofessional conduct for any attending physician recommending cannabis for medical purposes to be employed by or enter into any other agreement with any person or entity dispensing cannabis for medical purposes.

The prohibition against corporate practice of medicine is a variation against the rule against unauthorized practice of medicine.  California Business & Professions Code Section 2052 defines the “practice of medicine” as follows:

Any person who practices…advertises or holds himself or herself out as practicing, any system or mode of treating the sick or afflicted…or who diagnoses, treats, operates for, or prescribes for any ailment, blemish, deformity, disease, disfigurement, disorder….

California allows the use of cannabis for medical purposes by a patient upon the recommendation of an attending physician.  According to California Health & Safety Code, Section 11362.7(a), “attending physician” means:

an individual who possesses a license in good standing to practice medicine or osteopathy issued by the Medical Board of California or the Osteopathic Medical Board of California and who has taken responsibility for an aspect of the medical care, treatment, diagnosis, counseling, or referral of a patient and who has conducted a medical examination of that patient before recording in the patient’s medical record the physician’s assessment of whether the patient has a serious medical condition and whether the medical use of marijuana is appropriate..

California Business & Professions Code Section 2525 requires the attending physician to conduct a medical examination before providing a recommendation for medical marijuana.  California Business & Professions Code 2525 does not permit delegation of this requirement to a PA, RN or NP. In November 2017, Medical Board of California issued Guidelines for the Recommendation of Cannabis for Medical Purposes. The Guidelines outlined (among other things) the requirements for a patient evaluation.  The Guidelines also emphasized California Business & Professions Code Section 2525.3, which provides that physicians who recommend cannabis to a patient for a medical purpose without an appropriate prior examination and a medical indication, are engaged in unprofessional conduct.

In addition to these cannabis-specific guidelines, Medical Board of California, in the Guide to the Laws Governing the Practice of Medicine by Physicians and Surgeon, provides examples where non-physicians would be involved in the unlicensed practice of medicine, and the physician may be aiding and abetting the unlicensed practice of medicine. Some of these examples include:

  • Determining what diagnostic tests are appropriate for a particular condition.
  • Determining the need for referrals to or consultation with another physician or specialist.
  • Responsibility for the ultimate overall care of the patient, including treatment options available to the patient.
  • Non-physicians operating a business for which physician ownership and operation are required: any business advertising, offering, and/or providing patient evaluation, diagnosis, care, and/or treatment— services that can only be offered or provided by physicians.
  • Physician(s) operating a medical practice as a limited liability company.
  • A physician acting as “medical director” when physicians do not own the practice. For example, a business offering spa treatments that include medical procedures such as Botox injections and laser hair removal that contracts with a physician to be its “medical director.”

These are repeated in Medical Board of California’s webpage on corporate practice of medicine.

Under California Business & Professions Code Section 2052, the unauthorized practice of medicine is a crime which can be prosecuted as either a felony or a misdemeanor, depending on factors such as the underlying facts of the case and a criminal history.

If convicted of a felony offense, the defendant can be sentenced to serve up to three years in prison and fined up to $10,000. If convicted of a misdemeanor, the possible sentence includes up to a year in jail and fines.  In some instances, suspension or revocation of physician licenses also may result. Additionally, both federal and state agencies may elect to pursue civil prosecutions for violations including, and related to, the unauthorized practice of medicine and corporate practice of medicine.  These civil prosecutions come with hefty fines, calculated with a per-day, per-violation fine, and accompany enforcement orders which may restrict or prohibit business operations.

Thus, the overlap in the restrictions of both corporate practice of medicine and unauthorized practice of medicines centers around intrusions on clinical decision-making. And there is considerable enforcement discretion as to what constitutes such intrusion, with Medical Board of California taking a broad view of what constitutes a violation.


California and other state medical boards still run undercover investigations for unlicensed practice of medicine. California is in the minority of states that have a statute that authorizes […]

Telehealth & Cannabis Recommendations

The Medical Board of California states that the use of telehealth for cannabis patients is permitted, so long as the telehealth practice is in compliance with California Business & Professions Code Section 2290.5 and used in a manner consistent with the standard of care.

California Business & Professions Code Section 2290.5(e) defines “telehealth” as the mode of delivering health care services and public health via information and communication technologies to facilitate the diagnosis, consultation, treatment, education, care management, and self-management of a patient’s health care while the patient is at the originating site and the health care provider is at the distant site.”

On its webpage regarding telehealth, the Medical Board of California emphasizes the following:

  • Physicians using telehealth technologies to provide care to patients located in California must be licensed in California.
  • Physicians need not reside in California, as long as they have a valid, current California license.
  • Physicians are held to the same standard of care, and retain the same responsibilities of providing informed consent, ensuring the privacy of medical information, and any other duties associated with practicing medicine regardless of whether they are practicing via telehealth or face-to-face, in-person visits.
  • Information consultations between practitioners, telephone conversation, email or IM, or fax, are not telemedicine in California.

However, every state has its own laws concerning telehealth practices.  While we do not canvass those rules in a state-by-state review, note that the general rule is that telehealth is governed both by the law of the state in which the physician is located (the “home state”) and, the law of the state in which the patient is located (the “remote state”).

In many (if not most) states—with some exceptions—the physician must also be licensed in the state in which the patient is located. Thus, it is not sufficient that the physician is licensed in California, if the patient is located in another state.

As well, some states may require that the physician—or a suitable licensed designee, such as (for example) an NP or PA—conduct an in-person exam of the patient.

Moreover, each state may have different laws, regulations, and policies, concerning therapeutic recommendations involving cannabis.

As well, there is some legal ambiguity regarding the legality of telehealth as it applies to cannabis practices.  California law, as noted, has a liberal policy toward telehealth so long as the practice comports with standard of care (and other legal requirements are met); however, California law—at least according to statements by the Medical Board of California—is much stricter with regard to prescription via telehealth, and favors use of an in-person exam, conducted by the attending physician.

Is it unclear whether a cannabis recommendation would be evaluated according to California’s more liberal telehealth policy, or according to its stricter policy with respect to prescription medications.

This is an area of enforcement discretion where it is difficult to “read the tea leaves” with utter certainty. However, as noted, the Guidelines outline the requirements for a patient evaluation and also emphasize California Business & Professions Code Section 2525.3, which provides that physicians who recommend cannabis to a patient for a medical purpose without an appropriate prior examination and a medical indication, are engaged in unprofessional conduct. Also compelling is the requirement we have mentioned from Health & Safety Code Section 11362.7(a) that the “attending physician” must have “conducted a medical examination.” Thus, a telehealth practice would have serious legal risks.

Further, although California’s Compassionate Use Act allows the use of cannabis for medical purposes, there is potential for enforcement in (or from) other states (e.g., the Remote State) where cannabis is prohibited, or based on the potential for enforcement under Federal law.

And, the prospect of federal enforcement remains, as federal policy and enforcement priorities around cannabis use continually shift.

Cannabis is still listed under Schedule I of the federal Controlled Substances Act.  This January 2018, the U.S. Attorney General updated its cannabis enforcement policy and withdrew the 2013 Guidance Regarding Cannabis Enforcement, which had reiterated cannabis’s classification as an illegal substance under federal law; yet had advised states and local governments to effectively regulate legalized cannabis.  This withdrawal indicates that potential for individual enforcement actions including criminal prosecutions, exists.  In this respect, extreme caution is advised when developing a telehealth service that proposes services for out-of-state patients facilitated by out-of-state practitioners.

Cannabis Ventures Shouldn’t have to Read the Legal Tea Leaves

Unfortunately, enforcement discretion leaves a guessing game.  However, there are some parameters that cannabis companies can follow.

  • The MSO model is a well-recognized way for a healthcare venture to create value from the business services the MSO can offer to a medical practice. This model can also be imported into the cannabis and medical marijuana setting.
  • The MSO acts as the business and marketing arm of the physician. The idea is to keep the physician in charge of clinical activities without undue intrusion by the business side.
  • Clinical personnel should be hired by and within the professional business structure of the physician (for example, the professional medical corporation).
  • Clients often blur MSO activities from those that should remain on the clinical side. One helpful exercise is to create a chart where Column A represents services within the MSO domain; Column B represents services within the professional medical corporation domain; and Column C is for comments.

The horizontal grids fill in the list of services and products.  The client simply mark an X and can discuss with our cannabis lawyer what belongs, where.

To understand and navigate your way through the complex landscape of California cannabis law, Contact Cohen Healthcare Law Group. Our healthcare lawyers are respected and admired for their experience as California marijuana lawyers.

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